Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, analyzes the Bank of Japan’s (BoJ) strategy and its implications for the Yen (JPY).

It seems quite difficult to understand why the Japanese are objecting to a weak Yen

It seems quite difficult to understand why the Japanese are objecting to a weak Yen. The BoJ is pursuing an ultra-expansionary monetary policy, so does everything to push inflation up (or to be precise: to prevent the expected fall in inflation to below the 2% target). A weak JPY would be very helpful to reach this target because it would increase import prices.

Of course, the desired inflationary effect and the positive economic effect are set off against a negative wealth effect. However, there is no such thing as a free lunch. If inflationing really was being taken seriously Japanese institutions would probably be willing to pay this price.

And so to some extent what Japan has often been accused of: inflationing has failed for approx. 30 years now because it is not taken seriously enough. I can only hope that this lack of consistency will not have the opposite effect one day: that it will turn into high inflation levels that are difficult to control, into a crisis of national finances and in explicit Yen weakness to an extent that will make the current Yen exchange rates seem like a walk in the park.